Why Alcoa Doesn't Seem So Shiny

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

So what: Along with the downgrade, analyst Jorge Beristain lowered his price target on the stock to $5.50 (from $9.00), representing about 30% worth of downside to its Tuesday close. While value investors might be attracted to the stock's decline in 2013, Beristain thinks that the deteriorating outlook for Alcoa's primary aluminum business leaves plenty of possible downside.

Now what: Based on the firm's gloomy aluminum view, Beristain cut his EPS estimate for 2014 and 2015 by more than 50%. "Our downgrade is primarily driven by DB's lower medium-term aluminum price outlook (12-13% lower in 2014-15 to $0.82 and $0.88/lb, respectively)," wrote Beristain in a note to clients. "In this report we postulate that Alcoa should consider spinning off Primary to reduce its negative drag and maximize equity value." Of course, with the stock now off about 15% from its 52-week highs and trading at a paltry price-to-cash flow of around 5, patient long-term Fools might want to pounce on that pessimism.

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